Monday, August 6, 2012

Update note 8/14/12: this case, particularly
the plaintiffs' attempt to create a defendant class of appraisers,
presents significant new liability issues for appraisal management and
appraisers. I will address the liability issues in this case and in
other current AMC litigation (including the FDIC's actions against two
national AMCs) in a webinar hosted by the Appraisal Institute on
September 12, 2012. The details and registration information are on the
Appraisal Institute's webinar page at this link.

West Virginia has been among the riskiest states in which to be a
residential appraiser for several years. Currently, residential appraisers are more likely (per capita) to be sued in West Virginia than in
any other state. A plaintiffs' law firm has elevated that level of
risk to a higher level for one particular AMC and its panel appraisers in
West Virginia who performed appraisals for certain loans by the AMC's
primary client.
At the end of June, the law firm filed an alleged class
action on behalf of residential borrowers residing in West Virginia against
Title Source, Inc., which operates TSI Appraisal; Quicken Loans, which
is the AMC's corporate affiliate and primary client; two of the AMC's
panel appraisers; and all other appraisers in the state who performed
appraisals for loans by Quicken "after receiving an appraisal request
form with an estimate of value on it." Among the legal claims asserted
against the appraiser defendants are alleged causes of action for unfair
business practices, negligence and fraud, as well as alleged violation
of West Virginia's unique statute prohibiting residential property loans
in excess of fair market value. The complaint does not specify the
total damages demanded but does seek an order voiding all of the class
borrowers' loans, as well as compensatory and punitive damages.

Prior to the current mortgage crisis, it was a fairly normal practice
among lenders and AMCs when ordering an appraisal to provide the
appraiser with an estimated value. Most of the appraisals performed by
the alleged appraiser class for which estimated values were provided
will likely date to 2004 through 2007 -- as is the case with most
current appraisal litigation. Thus, this case typifies what we see in
general in the current litigation environment: appraisers and appraisal
firms being put to task for appraisal work that is now 5 to 8 years old
(any relevant statutes of limitation have nothing to do with USPAP's
minimum 5-year record-keeping period) and which was performed in
accordance with common industry practices accepted by lenders and
acquiesced to by regulators during that period.

This case, however, is anything but typical. Borrower class actions are
nothing new, and lawsuits against AMCs and individual appraisers are
commonplace too. What is new here and what makes this case a nightmare
for the AMC and its panel appraisers is the plaintiffs' attempt to turn
the case into a "defendant class action" -- that is a lawsuit against
all appraisers in West Virginia who performed appraisals through the
AMC after receiving an assignment with an "estimate of value."
Defendant class actions are procedurally unusual but can be powerful
legal weapons if a defendant class is certified. For example, if a
class of appraiser defendants is certified, the liability of all
included panel appraisers conceivably would be established without their
ever having defended themselves because it is the two named appraiser
defendants who are tasked with defending all the class members. And, as
explained below, the two appraisers named as defendant representatives
are hardly the ones any appraisers would hope to lead the defense --
with one of them having been sued six times, likely having no current
insurance
coverage to cover this new case, and having filed for bankruptcy. To be
sure, there are big procedural
hurdles for the plaintiffs to clear before a class of defendant
appraisers can be certified, but will there be anyone to make the good
arguments against class certification for the unnamed appraisers?

Here is the proposed definition of the class of appraiser defendants from the first amended complaint:

What makes the lawsuit more scary for the AMC and its appraisers is that
the same law firm previously sued Quicken and one of the two named
appraisers -- Dewey Guida -- in 2008. That earlier case concerned a
2006 appraisal for a borrower's $144,000 loan. In that situation,
appraiser Guida had received an assignment sheet with an estimated value
of $262,500 for the subject property. The homeowner herself had
submitted an estimate that the value was $250,000. Notwithstanding the
high
estimate on the assignment sheet, appraiser Guida opined in his report
that the value was only
$181,700. Yet, following a bench trial in 2009, the trial court judge
concluded the value was still inflated, forgave the borrower's mortgage,
and then awarded the borrower $17,500 in compensatory damages. In a
later phase of the case, the judge awarded over
$2.1 million in punitive damages and almost $600,000 in attorneys'
fees and costs. On top of that, appraiser Guida settled the claims
against him by
that borrower (and possibly other borrowers) for an additional
$700,000. In all, appraiser Guida has now been sued in at least six
cases about appraisals he performed for Quicken and TSI. The limits of
his insurance likely have been or will soon be exhausted by the prior
cases; he has no current coverage to defend this new case because --
according to one of the lawsuits he is involved in -- his policy lapsed
for nonpayment; and he has filed for bankruptcy. Coincidentally, in a
2011 article in Valuation magazine, I wrote that an earlier case involving this same appraiser and lender could be a harbinger of future liability
issues facing appraisers and AMCs, but I never imagined the nightmare that has unfolded in West Virginia. Here is a link to that article: "Full Court Pressure: Several Recent Lawsuits Could Affect Appraiser Liability."

A full copy of the complaint in this case and related court documents can be found on www.appraiserlaw.com at this link. The case has been removed from state court to federal court.

Peter Christensen
is an attorney who advises professionals and businesses about legal and
regulatory issues concerning valuation and insurance. He serves as general counsel to LIA Administrators & Insurance Services. He can be reached at peter@liability.com.

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About the Author

Peter Christensen is an attorney and serves as LIA's general counsel. He previously practiced law with the law firms Latham & Watkins LLP and Irell & Manella LLP. He has a B.S. with an emphasis in accounting from U.C. Berkeley and also received his law degree from U.C. Berkeley (Boalt Hall School of Law). He's been a member of the California bar since 1993. He can be reached at peter@liability.com.Please read the important notice regarding this blog at the bottom of the page. Thank you.

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